You will be assimilated
24 October 2014 18:41 (South Africa)
Opinionista Ivo Vegter

How Mangaung can help and hinder entrepreneurs

  • Ivo Vegter
In a thoughtful blog post, Andile Khumalo questions whether ANC policy adequately addresses barriers to entrepreneurship. I agree that it doesn’t, but I’d go further than he does.

I recently recommended, on Twitter, Andile Khumalo’s excellent blog post about the distinction between entrepeneurship and small business, and how inadequately ANC policy documents address them. Khumalo is chief investment officer of MSG Afrika Investment Holdings and early next year plans to launch StartUpSA, a community of existing and aspiring entrepreneurs.

In response, Vuyisa Qabaka proposed I add my two cents. Qabaka, the “chief connector” at EmpowerWeb, an organisation that aims to crowd-source, as it were, groups of black professionals and entrepreneurs, offers advice for startups in a profile for TimesLive, after finance minister Pravin Gordhan mentioned his ideas in the budget speech of 2010.

Here, then, some thoughts on entrepreneurship as an engine for economic growth and job creation, and what ANC policy could do to stimulate it.

Broadly speaking, I agree with the views of both Khumalo and Qabaka. In particular, I would have added to Khumalo’s argument distinguishing between entrepreneurs and small businesses the observation that Qabaka makes, namely that there are too many obstacles in the way of both.

It is about the nature of these obstacles, and the very idea of government having a particular approach to entrepreneurship, that I would raise substantive issues.

Khumalo writes, about the ANC’s Economic Transformation Policy Discussion Document of 5 March 2012 (in PDF): “The document opens by stating: ‘We have an opportunity and an obligation to deliberate on actions which could best enable the economic emancipation of our people.’ The Oxford dictionary defines emancipation as ‘the fact or process of being set free from legal, social, or political restrictions; liberation’.”

Economic freedom is, indeed, the key to my view on the matter, but I fear my interpretation and that of the ANC are somewhat at odds.

I have often quoted from Henry David Thoreau’s famous 1849 essay entitled “On the duty of civil disobedience”. In it, he wrote: “The people must have some complicated machinery or other, and hear its din, to satisfy that idea of government which they have.”

This is equally true of politicians themselves. With the best of intentions, they feel they need to (and need to be seen to) be passing laws and writing regulations to better control the people by restricting what they believe to be undesirable actions and promoting what they believe to be beneficial.

The problem is, the government can never know this at a level of individual private enterprise. No single entity can do so, which is why “the private sector” is really just a convenient collective term for a staggering array of investors, inventors, and innovators, all of whom have different and competing ideas of what customers might need sufficiently much that they’d dedicate some of their limited incomes to it. This is why business failures are just as important as business successes, in the overall objective of rising prosperity and growth.

Note that the ANC’s policy document discusses “the creation of new firms”, but not their failure. They seem to think that politicians and bureaucrats are in a position to determine which to create and how to support them.

Would any government be able to discern the kinds of small, niche markets in which entrepreneurial businesses often thrive, or have the means to direct economic activity in such a way that all these widely differing demands upon productive industry can be satisfied? No. The best that government usually does is offer crude one-size-fits-all “solutions” to what the most vocal among its constituents – which usually means labour unions, organised lobby groups, or big business – assert they need.

So what we get is Telkom (raised by Qabaka as an obstacle to entrepreneurs), Transnet (raised by big business as an obstacle to export growth) and Eskom (raised by everyone as an obstacle to everything).

The problem is not only that such broad-brush solutions are insufficient even when they are efficiently implemented, but that what one lobby group or company or industry asserts it needs too often comes at the expense of another. Complex standards or onerous licence conditions benefit large, well-resourced companies, but raise barriers to entrepreneurs. Subsidies and tariffs may protect industries and the employment they create, but they often do so at the expense of other, competing businesses, and always do so at the expense of the consumer, whom the government is ultimately supposed to serve.

Thoreau continues with arguably his most famous line: “Yet [the] government never of itself furthered any enterprise, but by the alacrity with which it got out of its way. It does not keep the country free. ... It does not educate. The character inherent in the ... people has done all that has been accomplished; and it would have done somewhat more, if the government had not sometimes got in its way. ... Trade and commerce, if they were not made of india-rubber, would never manage to bounce over obstacles which legislators are continually putting in their way; and if one were to judge these men wholly by the effects of their actions and not partly by their intentions, they would deserve to be classed and punished with those mischievious persons who put obstructions on the railroads.”

Rarely has the role of government in promoting economic activity been better stated.

Qabaka mentions a number of obstacles, such as obtaining telecoms services or difficulty in raising finance. Others about which I have written in the past include:

  • Import tariffs that make procurement by both industry and consumers more expensive, in the (misguided) hope of stimulating local production of those imports.
  • Limits on property ownership in government housing programmes, which make such property useless as collateral and productive capital.
  • “Buy local” campaigns, whether for purposes of stimulating small-scale local industry or limiting the impact of transport on the environment.
  • Credit policy abuses among retailers, banks, and in particular, among our major telecommunications firms.
  • Onerous licence conditions for all sorts of services, and the catastrophic consequences of failing to comply with bureaucratic rules, procedures and deadlines.
  • Viewing flexible and casual labour as being somehow iniquitous and exploitative, opposition to which benefits only powerful union interests.

But another key difference between countries where entrepeneurship is an engine for growth and those where it is not, is what the legal consequences of business failure are.

Research by Shikar Gosh, a senior lecturer at Harvard Business School, finds that failure rates for startup businesses is between 30% and 95%, depending on how strictly you define “failure”.

University of Tennessee data suggests that a quarter of all startups fail in their first year. Half fail by year four. By year eight, two thirds have disappeared. Most business failures are caused by simple incompetence or inexperience – the very same reason why government cannot reasonably expect its carefully planned efforts at “service delivery” to exceed the success of the surviving third of multiple concurrent private competitors, once two thirds have failed.

What distinguishes truly entrepreneurial countries is what happens when a business does fail. Most successful entrepreneurs have learnt what it takes by failing. Famously, Henry Ford failed five times in business before founding his eponymous motor company. Rowland Macy failed seven times before his New York store became a success. Soichiro Honda was turned down for a job at Toyota before he started making scooters. Walt Disney was fired for lacking imagination and having no good ideas, and appeared to be proving his editors right by starting a number of business that failed, before he hit the winning formula. Richard Branson, Sir Philip Green, Donald Trump, Bill Gates, Frank Woolworth, all have similar stories.

Modern advice for entrepreneurs is not to avoid failure, but to fail fast.

In our country, however, it is hard for the founder of a failed business to pick themselves up, learn from the experience, and try again. Personal liability ruins them, and sequestration prevents a person from becoming a director of a formal company again. In addition, consumer credit blacklisting is a mess, affecting an estimated 2.4 million South Africans. 

Result? The few among us who are capable and bold enough for entrepreneurship have one shot at it. If we fail, as most do at least once in their lives, that’s it. Game over. Thank you for playing. The government doesn’t think you deserve to try again.

True, one does wish to hold directors (and personal debtors) accountable for actual malfeasance, of course. If necessary, one wishes to claim from them the proceeds of their misdeeds, to recompense investors and customers who feel hard done by. But given that the Tennessee research finds fraud or neglect to be a factor in only 1% of business failures, is it not reasonable to bias the law a little towards helping failed entrepreneurs recover and try again, rather than punishing those who failed because of ill intent?

What concerns me about the ANC policy document on entrepreneurship is the apparent belief that the government ought to make choices such as one Khumalo quotes: “Should we look for new investors in mining in order to open new opportunities for black entrepreneurs, or should we go with more experienced existing companies?”

What bothers me is the notion that active, government-directed policy is required, rather than passively removing unnecessary restrictions, pitfalls and obstacles to starting new businesses. The policy document refers to “reducing unnecessary regulatory uncertainty”, but not to reducing unnecessary regulation.

It is troubling that policy makers seem so enamoured with the idea of picking winners and losers among private competitors by using the public fiscus to award tenders to companies labelled as “small, medium and micro enterprises”.

Nobody disputes – and the vibrancy of our informal economy is testament to – the work ethic and innovation of which South Africans are capable. 

If it were easier to establish a formal businesses, easier to account for their operations to satisfy the ever-hovering taxman, easier or unnecessary to obtain the myriad licences now required to operate businesses, easier to hire and fire staff, and easier to recover from a failed business to try something else, we would produce more entrepreneurs, more small businesses growing into large ones, and more new large businesses displacing the lumbering incumbents that weigh so heavily on consumers today.

If the ANC’s answer to section 12 – “the role of the state in economic transformation” – were different, it wouldn’t need section 13 – “the challenge of implementation”. A policy document aimed at stimulating entrepreneurship ought to have at its heart the alacrity with which government resolves to get out of its way. DM

  • Ivo Vegter
IvoVegterBW

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He approaches issues from the perspective of individual liberty and free markets. He grew up in the deep south of Johannesburg, and learnt his politics reading the Weekly Mail and Vrye Weekblad at Wits University during the early years of the country's transition to democracy. He recently left the city for the lower cost of living of Knysna, where he continues to write about everything under the sun. He is always right.

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